Paralegal

Tax Planning in the Court of Protection: son of a woman with dementia awarded gift in excess of £6m

The Court of Protection has recently ruled that a Power of Attorney should be allowed to make a gift in excess of £7m from his mentally incapacitated mother’s £18.6m estate, including receiving a gift of £6m himself.

PBC is the only living son of JMA, an elderly woman suffering from early onset dementia and requiring full time care. PBC was appointed as JMA’s attorney for property and affairs by a Lasting Power of Attorney (“LPA”) in August 2010. Authority was sought from the Court to make various gifts together exceeding £7m. The primary purpose of the application was to mitigate JMA’s inheritance tax (“IHT”) liabilities on death. The tax effect of this proposal was to reduce the amount of IHT that JMA’s estate would be liable to pay from approximately £6.2m to £3m provided she survived at least 3 years after making the gifts.

The Mental Capacity Act 2005 (“MCA 2005”) allows LPA’s to make certain gifts without the Court’s approval. For example, an LPA can buy a birthday present for themselves or someone else related to or connected with the donor, if that is what the donor would have done and provided the amount is reasonable and proportionate to the size of the estate. An LPA can also make gifts to a charity to whom the donor made gifts to when they had capacity. However, a tax planning gift on the scale proposed by PBC would require the Court’s approval.

Where a person lacks capacity to make a decision in respect of their property and affairs, the powers of the Court are set generally in section 16 of the MCA 2005, and more specifically the power to make a gift is set out in section 18 of the MCA 2005. The exercise of those powers includes the requirement that the gift must be made in the donor’s best interests.

The Court were therefore tasked with determining whether the terms of the proposal were in the best interests of JMA. The factors that the Court considered included firstly; whether the gifts would deny JMA sufficient funds to meet her needs for the remainder of her lifetime; secondly, JMA’s past wishes and feelings about gifts and tax planning; thirdly, the beliefs that would inform JMA’s decision to make the gift if she had capacity; and fourthly, the views of JMA’s family members.

In this case, following the gift, JMA would be left with over £10m. The Court considered this sufficient to meet JMA’s needs for the remainder of her lifetime. In addition, JMA had a history of tax planning when she had capacity, indicating that the gifts were consistent with her beliefs and values. The recipients of the gifts were individuals and charities whom JMA had chosen to benefit under her will; the gifts simply enhanced these gifts by way of tax mitigation. The Court also considered the fact that JMA had appointed PBC as her LPA when she had capacity as evidence that she trusted his judgement. Finally, the Official Solicitor, JMA’s litigation friend, agreed that it was in her best interests for the gifts to be made.

This gift is known as the largest ever approved by the Court of Protection on behalf of an individual lacking capacity to manage their property and affairs. However, the Court made it clear that mitigating tax does not automatically mean making a gift would be in an individual’s best interests. The Court consider each application based on the facts and individual merits of the case. Detailed cash flow projections and careful presentation is needed if such applications are to be successful.

If you require further information on this topic, the Court of Protection team at Anthony Gold can offer advice and assistance. Please contact a member of our team on 020 7940 4000.